Author: Nanda Min Htin, Singapore Management University
In September 2021, ten Chinese state bodies jointly declared all cryptocurrency (‘crypto’) transactions illegal, while the National Development and Reform Council promised to phase out crypto mining completely. While the ban ostensibly undermines China’s vaunted semiconductor capacity development aims, it gets China out of a potential losing battle with the United States in mining rig exports. But how does the mining ban play into China’s semiconductor trade war?
Semiconductors are a crucial component of any mining machine. Given the computational demands of mining, special machines called application-specific integrated circuits are required, which are equipped with semiconductor process nodes ranging from five to seven nanometers (nm). The smaller the node, the more advanced the mining technology will be.
China is a dominant chip importer, with Taiwan Semiconductor Manufacturing Company (TSMC) producing almost all of the chips incorporated into mining machines. SMIC, China’s domestic champion, can only manage to produce N+1 nodes at best, insufficient for competitive circuits.
Crucially, the international crypto mining hardware market is expected to grow rapidly, to over US$2.8 billion between 2020 and 2024. It is particularly interesting to examine whether China’s mining ban may materially affect its position in trade conflicts with other countries.
China is surrendering its only advantage in semiconductors by triggering an exodus of mining rig manufacturers. In 2018, Beijing-owned Bitmain produced 84 per cent of the world’s bitcoin mining equipment. The edge that China once enjoyed over the United States from selling mining rigs has now evaporated.
North America now dominates the overall mining equipment market and is expected to do so until at least 2027. The United States has also replaced China as the world’s largest bitcoin-mining nation. Big players such as Bitmain have cut US$300 million worth of orders from TSMC and are moving most production out of China. Over time, this exodus of miners is likely to attract rig manufacturers to relocate their production to the United States, which houses longstanding production infrastructure for integrated circuits and offers geographical proximity between rig producers and end-users.
Even if China had not instituted the mining ban, its original dominance as a mining rig exporter cannot be taken for granted, as the United States can muscle Taiwan to restrict TSMC’s sales to China. Under the influence of both the Trump and Biden administrations, TSMC has readily forsaken Huawei, its second largest customer, and suspended orders from multiple Chinese supercomputer companies.
TSMC’s allegiance to the United States is entrenched across business and politics. For one, TSMC’s intellectual property and machinery are almost entirely imported from American or American-allied companies such as Applied Materials. The United States also offers a bulwark against China’s simmering military threat. For instance, the 2019 sale of US$8 billion worth of military technology to Taiwan resulted from the Taiwan Relations Act passed by Congress. Non-tariff measures also permeate the broader chip market as the United States attempts to decouple its semiconductor chain from China.
The Bureau of Industry and Security has drawn out an Entity List which enumerates the entities and countries subject to restrictions for US exports, particularly semiconductors. In 2020, 108 Chinese entities had been added to the list — twice the number added in 2018. While mining machine manufacturers such as Bitmain have not yet been listed, their inclusion remains a real possibility given their technological significance.
While the Entity List imposes restrictions on entities, the Bureau of Industry and Security enforces another form of export control on items such as mining machines via the Commerce Control List. Ironically, all ten sectors under Made In China 2025 have either been classified as dual-use technologies (any technology which can be converted or used for military purposes), or are bound to find themselves on the list.
But China’s crypto mining industry was never more than a fragile advantage in the semiconductor wars. Instead, the strong recent growth in the semiconductor industry stems from other sectors such as central processing units, graphics processing units and field-programmable gate arrays which appear to hold more weight in its Made In China 2025 objective.
Trade concerns aside, China’s mining ban must also be assessed against other arguably more pressing national interests. Beijing has consistently enshrined central regulatory oversight over capital flows within the country, an aim which the decentralised and often anonymised nature of cryptocurrencies squarely contradicts. Indeed, China’s central bank digital currency, the e-CNY, has just launched internationally during the Winter Olympics. And China cannot afford to compromise its pledge to lower carbon emissions by the environmental costs incurred by mining.
It may appear that China’s mining ban has compromised its leadership in mining machine exports, but this is actually a wise move that allows China to reassess its priorities. While the United States may capitalise on China’s exit from the mining machine game, it ought to watch out for China’s growing focus on other priority sectors in the semiconductor industry.
Nanda Min Htin is an LLB candidate at the Singapore Management University and an Asia-Pacific Legal Innovation and Technology Association Steering Committee member.